The U.S. Government Shutdown(s)

The U.S. Constitution states that the Congress has the sole competence to decide on how the U.S. government spends its money. The American budgetary process works in the following way:

1. The government agencies (more than 430) create budget requests that are submitted to the White House Office of Management and Budget (OMB).

2. The U.S. President submits a budget proposal to the Congress.

3. The U.S. Congress votes on a congressional budget resolution — a non-binding document that provides a guideline for the appropriation bills (an "appropriation bill" is the name given to the law that determines how much money each agency gets).

4. All the government agencies are then grouped into 12 groups (e.g. defense, homeland security, financial services and general government, etc.). For each group, an appropriation bill will be prepared. It must be approved by the Congress and then by the U.S. President to become law. It is only at that point that the U.S. government can spend the money according to the bill.

If the Congress cannot agree on a regular appropriation bill, it can resort to voting on a "continuation resolution" that extends the funding of certain agencies based on the appropriation bill of the previous year. Only minor changes can be made in a continuation resolution. If the Congress cannot agree on a continuation resolution, there is a lapse in funding, commonly called a "government shutdown". Shutdowns last until Congress votes on an appropriation bill. During a shutdown, non-essential workers are laid off (sometimes temporarily) while essential workers must continue doing their job even though they receive no salary.

There have been fifteen shutdowns in U.S. history, but most lasted less than three days. The shutdown that ended two weeks ago after 45 days was the longest shutdown ever.

This past shutdown was ended by a continuation resolution that extends funding until January 30, 2026. Due to the polarized political landscape in the United States, one can expect that a new government shutdown will occur on January 30th as both parties will be trying to leverage budget discussions for the mid-term elections.

Investors should consider shutdowns as "non-events" — ephemeral political stints that have no long-term consequences on the economy of the United States, the value of the U.S. dollar, or the value of U.S. treasury bonds. The fact is that in the world, most democratic countries are going through a period of increased political polarization in response to significant external challenges (immigration, wars, external political risks).

The S&P 500 index is higher today than on October 1st, the first day of the shutdown. U.S. 10-year treasuries are at the same level as on October 1st, while the dollar index is higher by +1.4%. Talks about the shutdown being negative for the dollar or U.S. treasuries were wrong.